In this opinion, the Court of Chancery applied the two-pronged Tooley standard to determine whether a plaintiff’s breach of contract claims in the limited partnership context were derivative or direct. Finding such claims to be direct, the Court granted the plaintiff’s motion for class certification.

El Paso MLP’s limited partnership agreement (the “LPA”) eliminated all common law duties that the General Partner or the General Partner’s board of directors (the “GP Board”) might otherwise owe to El Paso MLP or its limited partners. Instead, the LPA divided the actions that the General Partner might take into broad categories and established contractual standards for each of the categories. The LPA established a highly deferential standard for non-conflict transactions, a narrower standard for general conflict transactions, and specific standards for certain types of transactions.

For conflict of interest transactions like the Southern Transaction, the LPA provided that the General Partner would not breach the LPA as long as the General Partner proceeded in one of four specified ways, each resembling a traditional common law technique for cleansing a conflict of interest transaction. The General Partner elected to proceed by creating a committee composed of disinterested members of the GP Board to consider the Southern Transaction. At its sixth meeting, the committee approved the Southern Transaction, having been advised by its financial advisor that the transaction was expected to be accretive to El Paso MLP’s unitholders. The GP Board accepted the committee’s recommendation and approved the transaction.

The plaintiff, a unitholder in El Paso MLP, challenged the Southern Transaction, claiming that the defendants breached the express terms of the LPA and that the GP Board aided and abetted the General Partner’s purported breach (together, the “Contract Claims”). In particular, the plaintiff asserted that the committee did not conduct a good faith evaluation of the Southern Transaction. The plaintiff contended that the committee had ignored the benefit of the IDRs to the General Partner and that the transaction was actually dilutive to the unaffiliated limited partners. The plaintiff framed the Contract Claims as direct claims and moved to certify a class of all holders of El Paso MLP common units other than the defendants and their affiliates. The defendants argued that class certification was inappropriate, because the Contract Claims were actually derivative in nature. The Court independently found that the class certification requirements of Court of Chancery Rule 23 were met and focused its attention on whether the Contract Claims were direct or derivative.

Relying on the standard outlined in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Court found that the plaintiff’s Contract Claims were direct, not derivative. Under Tooley, whether a plaintiff’s claim is derivative or direct depends on (1) who suffered the alleged harm and (2) who would receive the benefit of a remedy.

The Court found that the first Tooley prong supported characterizing the Contract Claims as direct, because the limited partners suffered a direct injury to their contractual right in the LPA, namely the right to a good faith approval of a conflict transaction. The Court discussed analogous corporate law decisions holding that stockholders can sue directly to enforce protective provisions in certificates of incorporation or bylaws, such as class vote and consent right provisions. The Court cited Tooley and post-Tooley opinions for the proposition that stockholders suffer direct injury and can sue individually for breach of contract claims, even if all stockholders posses the same rights and are injured in the same way.

The Court distinguished between suits for breach of the LPA and suits challenging the discretion afforded to the General Partner, noting that a claim that El Paso MLP paid too much for the interest in Southern would have been derivative. The Court also stated that, just as a stockholder can assert directly that a board of directors exceeded its discretionary authority, a limited partner also can assert directly that a general partner exceeded its authority by failing to comply with the LPA requirements.

Next, the Court found that the second Tooley prong could support a direct or derivative characterization of the Contract Claims. The Court noted that because El Paso Parent, through the General Partner, owned a significant percentage of El Paso MLP’s equity, a finding of wrongdoing on the part of the General Partner might support awarding relief to the unaffiliated limited partners. Additionally, possible remedies might include enjoining the General Partner from receiving benefits from some of its IDRs, particularly as the plaintiff had asserted that the committee did not consider the implications of the IDRs when approving the Southern Transaction. These remedies, operating at the unitholder level and not at the El Paso MLP level, supported a direct characterization of the Contract Claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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